Records show consultant had wide influence in Philly schools

The Boston Consulting Group has identified up to 60 Philadelphia school buildings as potential candidates for closure and helped line up private vendors willing to replace the School District's unionized blue-collar workforce at a $50 million discount.

These steps are just part of the blue chip consulting firm's far-ranging effort to help the beleaguered city school system rethink how it does business.

The broad scope of BCG's efforts this spring are detailed in previously unreleased "statements of work" obtained by the Notebook/NewsWorks under Pennsylvania's Right to Know law.

The School Reform Commission hired the Boston Consulting Group in February as part of an effort to radically overhaul a District plagued by poor student performance and teetering on financial collapse. BCG's work has been instrumental in shaping the District's bare-bones operating budget for the coming school year, its five-year financial plan, and the controversial "transformation blueprint" unveiled by the SRC in April.

In an interview Friday, District Chief Recovery Officer Thomas Knudsen said that BCG has to date identified at least $122 million in achievable savings for the cash-strapped District.

"We wouldn't have gotten anywhere near that number without their help," he said.

Nevertheless, officials revealed Friday that the District's shortfall for the coming school year has ballooned to as much as $282 million, much of which is expected to be closed through borrowing.

Documents and interviews make clear that BCG has been deeply involved in nearly every hot-button issue faced by the District, including continued expansion of charter schools.

But Knudsen was emphatic that the consultants have been taking directions, not giving them.

"I don't want this to be construed as if management took its foot off the brake and just gave the wheel to BCG," he said.

To date, the firm has been paid $2.7 million, all of which has come from outside donors.

In addition to the statements of work, a second set of documents obtained Friday by the Notebook/NewsWorks outline the complex relationship connecting BCG with the William Penn Foundation and United Way of Southeastern Pennsylvania. William Penn has directly contributed $1.5 million and helped raise another $1.2 million to fund BCG's work while United Way has served as a fiscal conduit for those funds (see related link.)

In separate interviews Friday, top leaders from William Penn and United Way lauded BCG's work and dismissed as "conspiracy theory" the claims by some critics that the firm and the private philanthropists supporting its work are part of a coordinated effort to privatize the city's public education system.

"This was about getting the foundation laid for the next superintendent," said United Way of Southeastern Pennsylvania president and CEO Jill Michal.

The commission has temporarily put on hold a controversial BCG proposal to turn over management of schools to independent "achievement networks," some of which would be privately run.

In response to public criticism that the firm's work has occurred almost entirely behind closed doors, the commission is expected to release a set of the consultants' analyses and recommendations as soon as this week.

At the moment, Boston Consulting Group has a limited presence in the District; funds to support the firm's $230,000 per week price tag ran out on June 11.

But on Friday, William Penn's President and CEO Jeremy Nowak said that he is working to raise another round of private money to support a fourth phase of BCG's work, to last until incoming Superintendent William Hite is established.

"As a funder, we have been very satisfied with their work," wrote Nowak.

BCG officials declined to be interviewed for this story, citing company policy.

'A 40-facility problem'

The SRC's "transformation blueprint" calls for closing one-fourth of the District's schools while dramatically expanding the number of city students who are enrolled in charters.

On Friday, Knudsen was emphatic that that District has no choice but to proceed with the next major step in that plan: shuttering 40 school buildings by September 2013.

"We absolutely know that we have a 40-facility problem," he said.

Behind the scenes, the consultants have been working for weeks to support that effort.

During May and June of this year, BCG was asked to develop new criteria for making school closure decisions and to identify an initial set of "60 top candidates for closure," according to the firm's "Phase III" statement of work.

Knudsen confirmed that BCG delivered both, but stressed that any criteria or potential targets are preliminary and subject to revision based on a series of public forums tentatively slated to begin later this month. BCG, he said, "began the conversation that continued inside [District headquarters] that has now taken us to a public position."

Last spring, the SRC voted to close eight schools based on a multimillion-dollar "facilities master plan" developed under the guidance of a different consulting firm, URS.

But District officials turned to BCG to get a "much more nuanced and sophisticated understanding of what is involved in closures," Knudsen said.

The statement of work asked the consultants to provide a "clean, validated baseline of facilities, utilization, financial, and student performance data."

District officials also asked BCG to construct criteria that would account for schools' academic performance, the proximity of other better-performing schools, and the potential impact on the surrounding community.

That work led to the list of the 60 schools to be considered for closure.

That list, however, has been filed away for the time being, said Knudsen.

A final list of schools recommended for closure is expected to be made public in October or November of this year, he said.

'The charter question'

The real value of BCG's "horsepower," said Knudsen, is the firm's capacity to take a "holistic" look at how big issues like school closings and what he called "the charter question" are interrelated.

One major driver of the District's facilities planning is a projection that as many as 40 percent of public school students in the city could attend charters by 2017.

If the charter enrollment projection holds true, said Knudsen, 24 additional buildings will likely have to be closed between 2014 and 2017 to keep the District's five-year financial plan in balance.

Critics say that shows the district plans to expand charters at the expense of traditional schools and contend the BCG is pushing that agenda.

But Knudsen said the consultant did not set the 40 percent target for charter enrollment. "We had to make a set of assumptions for modeling purposes, and that's what we did," he said, stressing that BCG is just informing the District's decision-making, not setting policy. "Their role as I have managed them is not to presume any specific outcome."

In fact, BCG conducted a citywide analysis that found that "a great many charter schools are not outperforming in a major way District schools," according to Knudsen.

The firm also examined whether charters up for renewal or expansion this spring are merely drawing students from successful District schools instead of furthering the SRC's goal of moving students from "low-performing seats" to "high-performing seats."

And BCG has also helped forecast what might happen if the District's budget situation or SRC policy were to change in the coming months.

"If there are fewer [charter] conversions or expansions, then we will not close as many [District] schools," Knudsen said. "Any promotion of the growth of charters is solely within the purview of the SRC."

Some District operations could be privatized

To quickly turn around the analyses requested of them, said Knudsen, BCG's team, which included as many as ten people at a time, has worked nearly round the clock. At one point, he said, the consultants even inquired if there was anywhere to shower inside District headquarters.

Despite their intensive effort, the District is still facing enormous challenges.

A massive budget shortfall for next year remains, and the cumulative five-year deficit facing the District is still around $1 billion.

To bring the District's books into balance, Knudsen and the SRC will seek deep concessions from labor unions.

The first skirmish in that effort has been with the District's 2,700 bus drivers, mechanics, maintenance workers and other unionized blue-collar employees, all of whom are facing layoffs beginning July 15.

Leaders of SEIU Local 32 BJ District 1201 say they have offered tens of millions in givebacks, but their proposals have been rebuffed by District leadership.

According to the documents obtained by the Notebook/NewsWorks, that's because BCG provided the District with a powerful sword to hold over workers' heads.

Knudsen confirmed Friday that the firm met one of the key deliverables outlined in their "Phase III" statement of work: Approved private vendors willing to provide transportation and facilities management services for $50 million less than the District's unionized workforce, plus a transition plan to make the shift to outside contractors for the coming school year if necessary.

"What was necessary for us to do was develop the alternative to the current business model," said Knudsen. "If we are going to end up privatizing, we needed an ironclad case that it was the logical conclusion to reach."

At the moment, said Knudsen, it's still an "open question" as to which direction the District will go. "The privatization that may occur is around the business operations," said Knudsen.

BCG's statements of work make no direct mention of the District's largest labor contract, with the Philadelphia Federation of Teachers.

Penn Foundation the "funder, not the manager"

The "statements of work" obtained by the Notebook/NewsWorks are directed from BCG senior partners to William Penn Foundation president Jeremy Nowak.

Interviews with key players, along with the memoranda of understanding between William Penn and the United Way, make clear that Nowak has had final responsibility for approving BCG's work and authorizing payment.

But following a Philadelphia City Paper cover story last Thursday that portrayed Nowak as the driving force in a coordinated effort to dismantle the District, both Nowak and District officials sought to counter the appearance that the foundation is overtly directing BCG's work.

"William Penn Foundation is the funder, not the manager, of BCG work," wrote both Nowak and District spokesperson Fernando Gallard in separate emails.

"William Penn Foundation did not make the decision to hire BCG and BCG does not report to the William Penn Foundation."

The District's Knudsen said that he personally has overseen BCG's work, while communicating regularly with Nowak about the progress that is being made.

"Ultimately, Jeremy signs the checks," said Knudsen. "But I think he relies heavily on me and my representations as to what they're doing and how satisfied I am that this work is going well."

While taking pains to clarify his role, Nowak praised the value of BCG's "great financial analytics, terrific evaluation protocols, and excellent understanding of cost structure and options for dealing with diminished funding from the state and city."

Despite the grassroots opposition to Boston Consulting Group's influential role in the District, both Nowak and the United Way's Michal said that the magnitude of the crisis facing Philadelphia schools has required outside expertise.

"It's a very important public dialogue," said the United Way's Michal. "But I just want to make sure that we give smart people the room to make smart decisions."

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